Five Smart Ways of Shorting Bitcoin

Five Smart Ways of Shorting Bitcoin

Investors can profit from BTC volatility even in a bear market.

Bitcoin is famous for its rollercoaster-style price fluctuations. When the price starts to plunge, nervous investors consider whether shorting Bitcoin can be a profitable trading strategy.

Even now, a number of market analysts remain pessimistic about the crypto, despite an already stunning loss of nearly 75 percent from its high of $19,783.21 on December 17, 2018.

A bear market presents additional opportunities to profit as the value of BTC drops. Still, its important to understand this advanced strategy fully before putting it into practice, as it also comes with significant risks.

The main concern for those thinking about short trading any asset is the built-in threshold for your potential return. If the price of Bitcoin were to hit zero, this would create a cap on the amount that you would gain.

You should also take into account that if the trend were to move against you, there is no counterposing value ceiling to offset any subsequent losses. However, certain instruments display a cyclical pattern of highs and lows which turn short trading into a valuable tool.

Here are several smart ways to short Bitcoin which should help make investing in a down-trending market easier.

Physical asset sale

When it comes to the most popular of digital currencies, sometimes the smartest move is knowing when to get off as it starts to take another wild ride.

If youve already jumped into the cryptocurrency market, you can capitalize on anticipated shifts by selling your holdings once you feel that an uptrend has peaked.

This strategy led to big profits for former IMF economist Mark Dow, who famously closed a huge short trade after a year. In an interview with Bloomberg, Dow blamed the bubble on people “believ[ing] the narrative” and a failure to actually understand the technology behind Bitcoin.

Although XTP/USD took a severe dive in 2018, history shows us that it may well stage a comeback in the future, so you should always look for the next chance to reinvest. Then, when the crypto stabilizes at a lower level, you can buy more tokens at the reduced cost.

The benefit is that with this scenario, you don‘t risk a loss. Instead, if you misjudged the trend, you’ll just have less of a gain than if you had stayed put.

Futures

Several exchanges and brokers offer Bitcoin futures. This type of contract was originally created as insurance for commodities that experienced frequent price fluctuations.

To short a futures contract, you would commit to selling a certain amount of BTC on a specific date at todays price, while another investor commits to buying the same amount on the same day at the price on the future date.

If the assets value drops by the end of the contract, you would earn the difference between the buy price and the sell price.

Contracts for Difference (CFDs)

If you like the idea of shorting Bitcoin using a futures contract, but would prefer not to physically hold tokens, you may be a good candidate for CFD trading.

This tool works on a similar principle, in that the buyer agrees to pay the seller the difference between the current price of a specified amount of Bitcoin and the future price at an agreed upon date in the future.

However, the amount is exchanged is based solely on price movements instead of transferring ownership of physical goods. One advantage of this investment vehicle over futures is that CFDs often allow the parties to exit a contract early.

A number of firms are seeking regulatory approval to offer this type of product, which should soon see broader adoption.

Prediction markets

Its common for investors to speculate on when the next BTC bubble will burst. While prediction markets have been in operation for decades, the unique decentralized nature of cryptocurrencies makes conditional investing particularly interesting.

This method of trading is often less complicated than ones which involved buying and selling tokens or CFDs since you are more interested in the price direction than in a specific movement size.

Although most outlets offering event derivatives allow you to add new entries, it should be relatively easy to find an existing prediction positing that the price for BTC will fall.

Crypto exchanges

Token enthusiasts may prefer to stick to crypto exchange trading when shorting Bitcoin. Exchanges have the backing of a number of big names, like Tyler Winklevoss, Co-founder of the Gemini Exchange. Last year, as the price began to slide, Winklevoss boasted to Microsoft CEO Bill Gates that his platform simplified shorting XBT.

Many of the of these businesses provide investors with access to leverage, which allows you to control more positions than can be covered by the amount held in your investment account.

For example, if you short trade a $10000 position of XBT/USD using 5:1 leverage, you would only need to give the exchange a deposit, or margin, of $2000.

The advantage is that if you guess correctly, and the price goes down, you would enjoy a profit five times greater than what you would earn without using leverage.

The downside is that if the market moves against you, you are exposed to a five times greater loss. Another hurdle for many traders is availability.

Many jurisdictions have banned going short when using exchanges because of the level of exposure introduced when shorting is combined with trading on margin.

Added Pros to Shorting Bitcoin

For those aware of the hazards, going short on cryptocurrencies can provide extra benefits that arent available using the basic “buy low, sell high” strategy. Many BTC investors also hold other digital assets subject to similar market forces.

Shorting Bitcoin while going long on a different asset with a complimentary price direction, such as Ethereum, can help diversify your portfolio.

Additionally, certain crypto tax strategies take advantage of asset devaluation “on paper” to offset short term capital gains. Of course, traders should consult professional tax advisors before opening a position with this goal in mind.

This post was written by the ADSS Research Team.